TAX TIP No. 56
Are you footing the costs of higher education for yourself or your family? Let your Uncle Sam lend a hand.
In this tax tip:
- Hope credit
- Lifetime Learning credit
- Credit comparison
- Limitations, coordination
- Midwestern students
A deduction reduces your taxable income, which can, but is not guaranteed to, reduce your final tax bill. A credit, however, is subtracted directly from the final tax you owe.
Hope credit
The Hope credit is the tax break you should look at first if you're putting kids through college, as long as one of those years your kid is a freshman or sophomore. For 2008 taxes, it could save you $1,800 per student (twice that for certain Midwestern disaster area students).This credit applies only to course-work costs spent in a student's first two years of higher education. The schooling can be at a college or vocational school, as long as the work at the institution leads to a degree or certification.
Keep in mind that you can only claim the Hope credit two times for the same student. So if your son didn't put in quite enough hours at university to be classified as a junior and you already claimed the Hope credit for his expenses on two previous tax returns, you can't use it again to cover his continuing education costs.
Lifetime Learning credit
In that case, your next option is the Lifetime Learning credit. It can be used for undergraduate, graduate and professional degree courses for anyone.This means a qualifying course you took to improve your current job skills or get new work could be partially paid for by the tax credit.
If you meet Internal Revenue Service guidelines, you can count $10,000 of your education expenses. If you have a child also going to college and that child has eligible expenses, you can count those toward the $10,000 total, too, since the credit can be applied to all qualified education expenses in a taxpayer's family.
These costs, however, don't translate directly to your tax break. Rather, you get to claim up to 20 percent of your eligible Lifetime Learning expenses, which could net you a maximum $2,000 credit (twice as much for certain Midwestern disaster area students).